Luxembourg’s low annual deficit spending and manageable debt gives it an enviable position as the EU pushes for a post-pandemic return to government spending limits, data released on Monday by the bloc’s statistics agency showed.
Luxembourg had the lowest debt in the EU, except for Estonia and Bulgaria, at the mid-point of this year, the Luxembourg-based statistics agency Eurostat said.
That debt, measured in relation to each country’s gross domestic product, fell further in July to 24.7% of GDP after Luxembourg repaid a €2 billion bond, the Finance Ministry reported at the time.
That was far below the eurozone average 90.3% of GDP, which was skewed by debt ratios of 166% in Greece, 142% in Italy, 112% in France and 106% Belgium, Eurostat found.
Luxembourg’s outgoing coalition government promised to hold the country’s sovereign debt below 30% to ensure its top credit rating and the ability to borrow at the lowest interest rates.
The Fitch ratings agency in June noted the low debt in confirming Luxembourg’s AAA credit rating. The Moody’s ratings agency in March had also confirmed the country’s top credit. Both cited sound public finances among other factors.
The CSV party, the top vote-getter in the 8 October parliamentary elections, agreed with its potential coalition partner, the DP of Prime Minister Xavier Bettel, that they should hold to below the 30% debt ratio. But their ongoing coalition talks got a quick warning days after the election when the General Inspectorate of Finance, the government’s budget forecaster, predicted that without changes to spending or income the national debt could exceed 30% after 2026.
The debt’s possible growth would follow approval last year of nearly €1 billion in various subsidies to help households with soaring inflation exacerbated by Russia’s invasion of Ukraine. Fitch said those support measures helped maintain household purchasing power, stimulating domestic demand and growth.
The central government’s budget ran a €228 million deficit in the first half of this year, nearly tripling the €87 million deficit posted after the first quarter, Finance Minister Yuriko Backes disclosed in July. Most provisions of the latest round of household support subsidies had not taken effect by the end of June, her ministry said.
“As a result, related spending will impact public finances in the second half of the year as well as in 2024,” the ministry said at the time.
The total deficit including for central state functions, social security costs and municipal operations could hit €1.5 billion this year, or 1.9% of GDP, the finance inspectorate forecast earlier this month. That would still be well within the EU’s guideline of 3%.
EU finance ministers meeting last week in Luxembourg failed to agree on how to pull back from pandemic-era emergency spending levels and set new fiscal rules. That deal will wait until next month at the earliest. The bloc will revert to the 3%-of-GDP limit that had been suspended to allow Covid-19 recovery schemes unless an agreement comes by the end of the year.
France and Italy signalled last month they would continue outstripping the 3% limit in their 2024 budgets. Germany slashed fourth-quarter borrowing plans and the deficit in Europe’s largest economy is projected at only 2.5% next year.
